Coyote Blog

As of this moment, Canadian tulip bulb marijuana company Tilray is trading at $146 a share for a total market capitalization of $11.2 Billion.  This is a company that had $10 million in revenues last quarter.   It is trading at a 420x multiple of last year's revenues.  It is up 20% today alone.  The race to own Canadian marijuana stocks in advance of the January 1, 2019 legalization in Canada is simply insane.  I would have attributed this to millenial dumb money leaving Tesla and looking for a new home, but a couple of weeks ago, American alcoholic beverage company Constellation Brands paid $4 billion for just a piece of another Canadian weed company.

Investments at this sort of valuation before the market even is opened are speculative in the extreme.  People will use the argument that "wouldn't you have wanted to be in on the ground floor of Coke or Pepsi or Phillip Morris or Anheuser Bush?"  A few responses:

1. Buying in at an $11 billion valuation is not really the "ground floor".  $11.2 billion is a higher market cap than Whirlpool or Hyatt or Alcoa.
2. The beer and cigarette and soft drink industries all started with hundreds, even thousands of competitors.  When RJ Reynolds started his tobacco company, there were 15 other tobacco companies in Winston-Salem alone.  Without your current hindsight, you would have been hard-pressed in the early stages of those industries to pick the winner.
3. This goes without saying, but we have no idea of the future size of the marijuana market, and even without the risk of trying to predict consumer behavior it is really hard to predict regulatory behavior
4. Usually only one part of the value chain of a new industry really makes the profits.  We have no idea where that will be in the marijuana business.  In beer and tobacco, the big profits are not with the growers of tobacco and hops, for example.
5. Early pioneers in an industry are often not the survivors.  Your computer today, is it a Tandy?  Kaypro?  Commodore?  IBM and Compaq don't even make PC's any more.  Apple does but only because it reinvented itself as a phone maker.  And how about those cell phone pioneers?  Is your phone a Nokia?  Motorolla?  Blackberry?

December $145 put options on Tilray are trading around $72 dollars, which essentially means that there are folks betting that the company will lose half its value in the next 90 days.  I can't remember ever seeing anything that extreme.

Update:  Well, a day later it is at over $200 and a $20 billion valuation.  Incredible.

"F.D.A. Cracks Down on Juul and E-Cigarette Retailers" today, via the NYT.

As of this moment, cigarette-maker Phillip Morris stock is up nearly 4.5% on the news.  This happens so many times in sloppy policy making that I can't even count them.  Do-gooders assume that when they ban things, like e-cigarettes, that individuals will turn to the regulators' preferred alternative, in this case abstinence from any type of vaping or smoking.  But in fact, many are much more likely to switch to tobacco smoking, which is orders of magnitude more dangerous than vaping.  Adults who think these things through, like investors on Wall Street, understand this so that is why Phillip Morris has gained over $5 billion in value today.  The FDA is working to create a whole new generation of tobacco smokers.

When I hear that "that teenage use of electronic cigarettes has reached 'an epidemic proportion,'" unlike the regulators I do not immediately assume this is unalloyed bad news.  Another way of putting this is an "epidemic of teenagers who are turning to safer alternatives to really damaging tobacco products."

And when it turns out the regulators just make things worse so they can win this news cycle of virtue signalling, there is no way they will take responsibility for it,

And if you want to be really, really cynical about this, you might remember that with the huge government tobacco settlement, the government essentially made itself business partners with the large tobacco companies.  Any competitors threatening the top companies in the settlement seriously threaten tax income to many state governments.

This is pretty funny, as highlighted in Reason's Hit and Run:

Under the plan, any person seeking a new job would be required to obtain an updated "counterfeit-proof" Social Security card, equipped with a digitized photo and an electronic identification strip containing the person's legal status. To offset fears of government intrusion, the card would be clearly marked, "This is not a national ID card," [California Republican congressman David] Dreier said.

Gosh, what a great solution.  Think of the applications.  All Phillip Morris has to do is write "this is not a cigarette" on each Marlboro and poof: all that nasty regulation and litigation goes away.  I guess I would not need a liquor license to sell Budweiser's labeled "this is not beer".  Or maybe Pamela Anderson can get a T-shirt that says "these are real".  LOL.

By the way, for business owners, don't miss this gem later in the article:

Employers would have to check a prospective employee's legal status against a new employment eligibility database either by swiping the card or calling a hot line. Those who fail to do so, or knowingly hire an undocumented worker, would face fines of up to $50,000 and five years in prison for each occurrence.

Nothing like spending 5 years in the slam for having one of your managers forget to check the ID of someone they hired.